FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-11023
E'town CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2596330
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Title of each class Name of each exchange on which registered
Common Stock, without par value New York Stock Exchange
Commission file number 0-628
ELIZABETHTOWN WATER COMPANY
(Exact name of registrant as specified in its charter)
New Jersey 22-1683171
(State of incorporation) (I.R.S. Employer Identification No.)
600 South Avenue
Westfield, New Jersey 07090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (908) 654-1234
Title of each class Name of each exchange on which registered
None None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock as of the latest practicable date
Outstanding at
Class of Common Stock: September 30, 1999
E'town Corporation (without par value) 8,637,588
Elizabethtown Water Company (without par value)* 1,974,902
* All shares are owned by E'town Corporation
===============================================================================
E'TOWN CORPORATION AND SUBSIDIARIES
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
INDEX
- -------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
E'TOWN CORPORATION AND SUBSIDIARIES
- Statements of Consolidated Income 1
- Consolidated Balance Sheets 2-3
- Statements of Consolidated Capitalization 4
- Statements of Consolidated Shareholders' Equity 5
- Statements of Consolidated Cash Flows 6
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Statements of Consolidated Income 7
- Consolidated Balance Sheets 8-9
- Statements of Consolidated Capitalization 10
- Statements of Consolidated Shareholder's Equity 11
- Statements of Consolidated Cash Flows 12
E'TOWN CORPORATION AND SUBSIDIARIES AND
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
- Notes to Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 20
PART II - OTHER INFORMATION 28
Items 1 - 5
Item 6 (a) - Exhibits 28
(b) - Reports on Form 8-K 28
SIGNATURES 29
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands Except Per Share Amounts)
(Unaudited) Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Operating Revenues $45,593 $ 43,907 $122,680 $108,783
- --------------------------------------------------------------------------------
Operating Expenses:
Operation 17,236 16,171 48,953 39,192
Maintenance 1,644 1,647 5,563 4,881
Depreciation and amortization 3,848 3,204 11,233 9,537
Revenue taxes 4,956 4,887 13,238 12,815
Real estate, payroll and other tax 891 599 2,753 2,215
Federal income taxes 4,209 4,482 9,277 9,395
- --------------------------------------------------------------------------------
Total operating expenses 32,784 30,990 91,017 78,035
- --------------------------------------------------------------------------------
Operating Income 12,809 12,917 31,663 30,748
- --------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 61 239 277 518
Federal income taxes (139) (191) (1,691) (427)
Gain on sale of land 3,197
Other - net 228 306 1,093 697
- --------------------------------------------------------------------------------
Total other income 150 354 2,876 788
- --------------------------------------------------------------------------------
Total Operating and Other Income 12,959 13,271 34,539 31,536
- --------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 3,884 4,049 12,090 12,082
Other interest expense - net 901 538 1,757 1,038
Capitalized interest (93) (181) (258) (397)
Amortization of debt discount and expense-net 111 107 331 324
- --------------------------------------------------------------------------------
Total interest charges 4,803 4,513 13,920 13,047
- --------------------------------------------------------------------------------
Income Before Preferred Stock Dividends
of Subsidiary 8,156 8,758 20,619 18,489
Preferred Stock Dividends 203 203 609 609
- --------------------------------------------------------------------------------
Net Income $ 7,953 $ 8,555 $ 20,010 $ 17,880
================================================================================
Earnings Per Share of Common Stock (Note 6):
- --------------------------------------------------------------------------------
Basic $ 0.92 $ 1.02 $ 2.34 $ 2.18
Diluted $ 0.91 $ 1.00 $ 2.30 $ 2.15
- --------------------------------------------------------------------------------
Average Number of Shares Outstanding for
the Calculation of Earnings Per Share:
- --------------------------------------------------------------------------------
Basic 8,612 8,381 8,562 8,201
Diluted 8,887 8,690 8,843 8,508
- --------------------------------------------------------------------------------
Dividends Paid Per Common Share $ 0.51 $ 0.51 $ 1.53 $ 1.53
================================================================================
See Notes to Consolidated Financial Statements.
-1-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) September 30,
1999 December 31,
Assets (Unaudited) 1998
- --------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 729,471 $ 717,985
Construction work in progress 43,688 16,580
- --------------------------------------------------------------------------------
Total utility plant 773,159 734,565
Less accumulated depreciation 134,909 125,262
- --------------------------------------------------------------------------------
Utility plant-net 638,250 609,303
- --------------------------------------------------------------------------------
Non-utility Property and Other
Investments - Net (Note 7) 84,017 84,945
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 10,229 5,909
Customer and other accounts receivable
(less reserve: 1999, $1,258, 1998, $1,065) 34,394 24,720
Unbilled revenues 14,083 12,198
Infrastructure loan funds receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,497 2,538
Prepaid insurance, taxes, other 1,919 2,515
- --------------------------------------------------------------------------------
Total current assets 68,779 53,775
- --------------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,633 1,371
Unamortized debt and preferred stock expenses 9,744 10,050
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,295 3,490
Other unamortized expenses 3,414 1,582
- --------------------------------------------------------------------------------
Total deferred charges 32,312 30,719
- --------------------------------------------------------------------------------
Total $ 823,358 $ 778,742
================================================================================
See Notes to Consolidated Financial Statements.
-2-
E'TOWN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands) September 30,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- --------------------------------------------------------------------------------
Capitalization (Notes 3 and 4):
Common shareholders' equity $ 229,301 $ 215,472
Mandatory Redeemable Cumulative
Preferred Stock 12,000 12,000
Redeemable preferred stock 227 227
Long-term debt - net 267,235 286,908
- --------------------------------------------------------------------------------
Total capitalization 508,763 514,607
- --------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 81,079 44,022
Long-term debt - current portion 30 30
Accounts payable and other liabilities 21,546 19,469
Contract obligations payable 19,000 12,000
Customers' deposits 207 248
Municipal and state taxes accrued 11,833 16,789
Federal income taxes accrued 621
Interest accrued 5,978 3,675
Preferred stock dividends accrued 59 59
- --------------------------------------------------------------------------------
Total current liabilities 140,353 96,292
- --------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 40,017 41,102
Federal income taxes 68,891 66,487
State income taxes 207 207
Unamortized investment tax credits 7,715 7,839
Accumulated postretirement benefits 3,944 4,090
- --------------------------------------------------------------------------------
Total deferred credits 120,774 119,725
- --------------------------------------------------------------------------------
Contributions in Aid of Construction 53,468 48,118
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities (Note 12)
- --------------------------------------------------------------------------------
Total $ 823,358 $ 778,742
================================================================================
See Notes to Consolidated Financial Statements.
-3-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands Except Share Amounts) September 30,
1999 December 31,
(Unaudited) 1998
- --------------------------------------------------------------------------------
Common Shareholders' Equity:
E'town Corporation:
Common stock without par value, authorized,
15,000,000 shares, issued 1999, 8,670,142
shares; 1998, 8,504,344 shares $ 176,230 $ 169,324
Paid-in capital 1,315 1,315
Capital stock expense (5,160) (5,160)
Retained earnings 57,884 50,961
Less cost of treasury stock; 1999 and
1998, 32,554 shares (968) (968)
- --------------------------------------------------------------------------------
Total common shareholders' equity 229,301 215,472
- --------------------------------------------------------------------------------
Preferred Shareholders' Equity
Elizabethtown Water Company:
Mandatory Redeemable Cumulative
Preferred Stock:
$100 par value, authorized, 200,000
shares; $5.90 series,
issued and outstanding, 120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000
shares; none issued
Applied Wastewater Management, Inc.:
Redeemable Preferred Stock:
No par value, noncumulative, issued
and outstanding, 227 shares 227 227
- --------------------------------------------------------------------------------
Total preferred shareholders' equity 12,227 12,227
- --------------------------------------------------------------------------------
Long-term Debt (Note 4):
E'town Corporation:
6 3/4% Convertible Subordinated
Debentures, due 2012 9,361 10,499
6.79% Senior Notes, due 2007 12,000 12,000
Liberty Water Company:
Contract Obligations Payable 19,000
Applied Wastewater/Applied Water Management:
Notes Payable 553 261
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
New Jersey Department of Environmental
Protection Notes 5,895 5,895
Other Notes Payable 173 30
- --------------------------------------------------------------------------------
Total long-term debt 268,277 287,980
Unamortized (discount) premium-net (1,042) (1,072)
- --------------------------------------------------------------------------------
Total long-term debt-net 267,235 286,908
- --------------------------------------------------------------------------------
Total Capitalization $ 508,763 $ 514,607
================================================================================
See Notes to Consolidated Financial Statements.
-4-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands Except Share Amounts)
Nine Months Ended
September 30, Year Ended
1999 December 31,
(Unaudited) 1998
- --------------------------------------------------------------------------------
Common Stock:
Balance at Beginning of Period $ 169,324 $ 153,162
Common stock issued under Dividend
Reinvestment and Stock Purchase Plan
(1999, 155,873 shares; 1998, 213,568 shares) 6,462 7,861
Redemption of Convertible Debentures
(1999, 27,825 shares; 1998, 18,100 shares) 1,113 724
Issuance of restricted stock under
compensation programs(1999, 2,856 shares;
1998, 9,590 shares) 120 332
Restricted stock issued/(redeemed) in
connection with acquisitions 1999, 25,756
shares; 1998, 186,310 shares) Note 7 (920) 6,653
Exercise of stock options (1999, 5,000
shares; 1998, 22,315 shares) 131 592
- --------------------------------------------------------------------------------
Balance at End of Period 176,230 169,324
- --------------------------------------------------------------------------------
Paid-in Capital: 1,315 1,315
- --------------------------------------------------------------------------------
Capital Stock Expense: (5,160) (5,160)
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 50,961 45,560
Net Income 20,010 22,330
Dividends on common stock (1999, $1.53;
1998, $2.04) (13,087) (16,929)
- --------------------------------------------------------------------------------
Balance at End of Period 57,884 50,961
- --------------------------------------------------------------------------------
Treasury Stock:
Balance at Beginning of Period (968) (954)
Cost of shares redeemed to exercise stock
options (1998, 346 shares) (14)
- --------------------------------------------------------------------------------
Balance at End of Period (968) (968)
- --------------------------------------------------------------------------------
Total Common Shareholders' Equity $ 229,301 $ 215,472
================================================================================
See Notes to Consolidated Financial Statements.
-5-
E'TOWN CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands) Nine Months Ended
(Unaudited) September 30,
1999 1998
- --------------------------------------------------------------------------------
Cash Flows Provided by Operating Activities:
Net Income $ 20,010 $ 17,880
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,233 9,537
Gain on the sale of land (3,197)
Increase in deferred charges (2,094) (2,486)
Deferred income taxes and investment tax
credits-net 2,280 2,148
Capitalized interest and AFUDC (535) (915)
Other operating activities-net 3,142 1,665
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt and net of the effects of
the purchase of companies:
Customer and other accounts receivable (9,236) (7,309)
Unbilled revenues (1,885) (349)
Accounts payable and other liabilities 1,917 8,343
Accrued/prepaid interest and taxes (1,483) 85
Other 555 (742)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 20,707 27,857
- --------------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Proceeds from issuance of common stock 7,706 6,464
Funds held in Trust by others 42
Debt and preferred stock issuance and
amortization costs 318 373
Issuance of other long-term debt 8,000
Repayment of long-term debt (13,156) (708)
Contributions and advances for construction-net 1,432 343
Net increases in notes payable - banks 37,057 17,584
Dividends paid on common stock (13,087) (12,621)
- --------------------------------------------------------------------------------
Net cash flows provided by financing activities 20,312 19,435
- --------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant and other capital expenditures (excluding
allowance for funds used during construction) (35,181) (29,643)
Purchase of companies (Note 7) (1,800)
Capital expenditures on privatization contracts (1,787) (19,865)
Proceeds from sale of land 2,069 1,700
- --------------------------------------------------------------------------------
Net cash flows used for investing activities (36,699) (47,808)
- --------------------------------------------------------------------------------
Net Decrease in Cash
and Cash Equivalents 4,320 (516)
Cash and Cash Equivalents at
Beginning of Period 5,909 6,233
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 10,229 $ 5,717
================================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 12,859 $ 10,505
Income taxes $ 7,100 $ 5,250
Preferred stock dividends $ 531 $ 531
See Notes to Consolidated Financial Statements.
-6-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
- --------------------------------------------------------------------------------
Operating Revenues $39,204 $ 38,821 $105,779 $102,067
- --------------------------------------------------------------------------------
Operating Expenses:
Operation 12,932 12,161 37,064 33,690
Maintenance 1,536 1,446 4,439 4,305
Depreciation 3,197 3,158 9,591 9,474
Revenue taxes 4,944 4,872 13,209 12,800
Real estate, payroll and other taxes 755 465 2,384 2,038
Federal income taxes 4,068 4,493 9,336 9,798
- --------------------------------------------------------------------------------
Total operating expenses 27,432 26,595 76,023 72,105
- --------------------------------------------------------------------------------
Operating Income 11,772 12,226 29,756 29,962
- --------------------------------------------------------------------------------
Other Income (Expense):
Allowance for equity funds used during
construction 61 239 277 518
Federal income taxes (133) (140) (495) (308)
Other - net 201 161 850 360
- --------------------------------------------------------------------------------
Total other income 129 260 632 570
- --------------------------------------------------------------------------------
Total Operating and Other Income 11,901 12,486 30,388 30,532
- --------------------------------------------------------------------------------
Interest Charges:
Interest on long-term debt 3,507 3,651 10,959 10,988
Other interest expense - net 490 229 868 627
Allowance for funds used during construction (75) (181) (240) (397)
Amortization of debt discount and expense-net 99 98 295 293
- --------------------------------------------------------------------------------
Total interest charges 4,021 3,797 11,882 11,511
- -------------------------------------------------------------------------------
Net Income 7,880 8,689 18,506 19,021
Preferred Stock Dividends 203 203 609 609
- --------------------------------------------------------------------------------
Earnings Applicable To Common Stock $ 7,677 $ 8,486 $ 17,897 $ 18,412
================================================================================
See Notes to Consolidated Financial Statements.
-7-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) September 30,
1999 December 31,
Assets (Unaudited) 1998
- --------------------------------------------------------------------------------
Utility Plant-At Original Cost:
Utility plant in service $ 723,050 $ 714,301
Construction work in progress 42,239 15,694
- --------------------------------------------------------------------------------
Total utility plant 765,289 729,995
Less accumulated depreciation and amortizatio 134,410 125,096
- --------------------------------------------------------------------------------
Utility plant-net 630,879 604,899
- --------------------------------------------------------------------------------
Non-utility Property (Note 7) 7,275 7,315
- --------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents 5,300 3,598
Customer and other accounts receivable
(less reserve: 1999, $777, 1998, $670) 22,156 16,952
Unbilled revenues 11,759 10,091
Infrastructure loan funds receivable (Note 4) 5,657 5,895
Materials and supplies-at average cost 2,497 2,538
Prepaid insurance, taxes, other 2,922 2,433
- --------------------------------------------------------------------------------
Total current assets 50,291 41,507
- --------------------------------------------------------------------------------
Deferred Charges:
Waste residual management 1,633 1,371
Unamortized debt and preferred stock expenses 9,029 9,368
Taxes recoverable through future rates 14,226 14,226
Postretirement benefit expense 3,295 3,490
Other unamortized expenses 3,547 1,152
- --------------------------------------------------------------------------------
Total deferred charges 31,730 29,607
- --------------------------------------------------------------------------------
Total $ 720,175 $ 683,328
================================================================================
See Notes to Consolidated Financial Statements.
-8-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands) September 30,
1999 December 31,
Capitalization and Liabilities (Unaudited) 1998
- --------------------------------------------------------------------------------
Capitalization (Note 3):
Common shareholder's equity $ 219,839 $ 208,573
Mandatory redeemable cumulative
preferred stock 12,000 12,000
Long-term debt - net 245,321 245,148
- --------------------------------------------------------------------------------
Total capitalization 477,160 465,721
- --------------------------------------------------------------------------------
Current Liabilities:
Notes payable - banks 46,000 22,000
Long-term debt - current portion 30 30
Accounts payable and other liabilities 11,837 12,457
Customers' deposits 207 248
Municipal and state taxes accrued 12,077 16,776
Interest accrued 5,285 3,228
Preferred stock dividends accrued 59 59
- --------------------------------------------------------------------------------
Total current liabilities 75,495 54,798
- --------------------------------------------------------------------------------
Deferred Credits:
Customers' advances for construction 39,971 40,874
Federal income taxes 67,008 64,696
Unamortized investment tax credits 7,705 7,839
Accumulated postretirement benefits 3,787 3,947
- --------------------------------------------------------------------------------
Total deferred credits 118,471 117,356
- --------------------------------------------------------------------------------
Contributions in Aid of Construction 49,049 45,453
- --------------------------------------------------------------------------------
Commitments and Contingent Liabilities
- --------------------------------------------------------------------------------
Total $ 720,175 $ 683,328
================================================================================
See Notes to Consolidated Financial Statements.
-9-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CAPITALIZATION
(In Thousands) September 30,
1999 December 31,
(Unaudited) 1998
- --------------------------------------------------------------------------------
Common Shareholder's Equity (Note 3):
Common stock without par value, authorized,
15,000,000 shares, issued 1999 and 1998,
1,974,902 shares $ 15,741 $ 15,741
Paid-in capital 139,209 132,753
Capital stock expense (485) (485)
Retained earnings 65,374 60,564
- --------------------------------------------------------------------------------
Total common shareholder's equity 219,839 208,573
- --------------------------------------------------------------------------------
Preferred Shareholders' Equity:
Mandatory Redeemable Cumulative Preferred
Stock $100 par value, authorized, 200,000
shares; $5.90 series, issued and outstanding,
120,000 shares 12,000 12,000
Cumulative Preferred Stock:
$25 par value, authorized, 500,000 shares;
none issued
- --------------------------------------------------------------------------------
Long-term Debt:
Elizabethtown Water Company:
7.20% Debentures, due 2019 10,000 10,000
7 1/2% Debentures, due 2020 15,000 15,000
6.60% Debentures, due 2021 10,500 10,500
6.70% Debentures, due 2021 15,000 15,000
8 3/4% Debentures, due 2021 27,500 27,500
8% Debentures, due 2022 15,000 15,000
5.60% Debentures, due 2025 40,000 40,000
7 1/4% Debentures, due 2028 50,000 50,000
Variable Rate Debentures, due 2027 50,000 50,000
The Mount Holly Water Company:
New Jersey Department of Environmental
Protection Notes 5,895 5,895
New Jersey Environmental Infrastructure
Trust Notes 7,295 7,295
Notes Payable (due serially through 2000) 173 30
- --------------------------------------------------------------------------------
Total long-term debt 246,363 246,220
Unamortized discount-net (1,042) (1,072)
- --------------------------------------------------------------------------------
Total long-term debt-net 245,321 245,148
- --------------------------------------------------------------------------------
Total Capitalization $ 477,160 $465,721
================================================================================
See Notes to Consolidated Financial Statements.
-10-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
(In Thousands)
Nine Months Ended
September 30, Year Ended
1999 December 31,
(Unaudited) 1998
- --------------------------------------------------------------------------------
Common Stock: $ 15,741 $ 15,741
- --------------------------------------------------------------------------------
Paid-in Capital:
Balance at Beginning of Period 132,753 124,560
Capital contributed by parent company 6,456 8,193
- --------------------------------------------------------------------------------
Balance at End of Period 139,209 132,753
- --------------------------------------------------------------------------------
Capital Stock Expense (485 (485)
- --------------------------------------------------------------------------------
Retained Earnings:
Balance at Beginning of Period 60,564 53,538
Net income 18,506 24,768
Dividends on common stock (13,087) (16,929)
Dividends on preferred stock (609) (813)
- --------------------------------------------------------------------------------
Balance at End of Period 65,374 60,564
- --------------------------------------------------------------------------------
Total Common Shareholder's Equity $ 219,839 $ 208,573
================================================================================
See Notes to Consolidated Financial Statements.
-11-
ELIZABETHTOWN WATER COMPANY AND SUBSIDIARY
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands)
(Unaudited) Nine Months Ended
September 30,
1999 1998
- --------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 18,506 $ 19,021
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,591 9,474
Increase in deferred charges (2,657) (2,214)
Deferred income taxes and investment tax
credits-net 2,178 2,109
Allowance for funds used during construction (517) (915)
Other operating activities-net 64 688
Change in current assets and current liabilities
excluding cash, short-term investments and
current portion of debt and net of the effects from
the purchase of companies:
Customer and other accounts receivable (4,901) (690)
Unbilled revenues (1,668) (2,650)
Accounts payable and other liabilities (683) 5,762
Accrued/prepaid interest and taxes (3,148) 730
Other 106 (742)
- --------------------------------------------------------------------------------
Net cash provided by operating activities 16,871 30,573
- --------------------------------------------------------------------------------
Cash Flows Used by Financing Activities:
Capital contributed by parent company 6,456 5,884
Funds held in Trust by others 42
Debt and preferred stock issuance and
amortization costs 345 339
Repayment of long-term debt (23) (19)
Contributions and advances for construction-net 1,614 333
Net increase in notes payable - banks 24,000 3,000
Dividends paid on common stock and preferred stock (13,618) (13,151)
- --------------------------------------------------------------------------------
Net cash provided (used) by financing activities 18,816 (3,614)
- --------------------------------------------------------------------------------
Cash Flows Used for Investing Activities:
Utility plant expenditures (excluding allowance
for funds used during construction) (33,125) (27,625)
Purchase of company (860)
- --------------------------------------------------------------------------------
Cash used for investing activities (33,985) (27,625)
- --------------------------------------------------------------------------------
Net Decrease in Cash and
Cash Equivalents 1,702 (666)
Cash and Cash Equivalents at
Beginning of Period 3,598 4,226
- --------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 5,300 $ 3,560
================================================================================
Supplemental Disclosures of Cash
Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 10,453 $ 9,177
Income taxes $ 7,100 $ 5,250
Preferred stock dividends $ 531 $ 531
See Notes to Consolidated Financial Statements.
-12-
E'TOWN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
E'town Corporation (E'town or Corporation), is the parent company of
Elizabethtown Water Company (Elizabethtown or Company), Edison Water
Company (Edison), E'town Properties, Inc. (Properties), Liberty Water
Company (Liberty), Applied Water Management, Inc. (AWM) and Applied
Wastewater Management, Inc. (AWWM). The Mount Holly Water Company (Mount
Holly) is a wholly-owned subsidiary of Elizabethtown. The assets and
operating results of Elizabethtown constitute the predominant portions of
E'town's assets and operating results. The regulated utilities,
Elizabethtown, Mount Holly and AWWM, comprise the Regulated Utilities
segment, Liberty and Edison comprise the Contract Operations segment, AWM
is the Engineering/Operations and Construction segment and E'town and
Properties comprise the Financing and Investment segment.
2. INTERIM FINANCIAL STATEMENTS
The financial statements reflect all adjustments which, in the opinion of
management, are necessary for a fair presentation. The Notes to
Consolidated Financial Statements accompanying the 1998 Annual Report to
Shareholders and the 1998 Form 10-K should be read in conjunction with
this report.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activity". In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activity - Deferral of the Effective Date of SFAS No. 133" to defer the
effective date of SFAS No. 133 for one year. Consequently, SFAS No. 133
will now be effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. The Corporation does not believe this
Statement will have any impact on its financial condition and results of
operations.
3. CAPITALIZATION
E'town routinely makes equity contributions to Elizabethtown which
represent a portion of the proceeds of common stock issued under E'town's
Dividend Reinvestment and Stock Purchase Plan (DRP). E'town contributed
$6.46 million from the DRP proceeds to Elizabethtown for the nine months
ended September 30, 1999.
4. LONG-TERM DEBT
In October 1998, E'town filed a registration statement with the Securities
and Exchange Commission (SEC) to issue up to $75 million of unsecured
medium-term notes. E'town plans to file an amended registration statement
with the SEC and issue approximately $30 million of these notes in the
first quarter of 2000 to repay short-term debt incurred to finance the
acquisition of the contract to operate the water system of the City of
Elizabeth and capital costs for the non-regulated subsidiaries.
In November 1998 Mount Holly closed on loan agreements that will make
available up to $13.19 million in proceeds from the issuance of unsecured
notes through the New Jersey Environmental Infrastructure Trust Financing
Program. This program provides financing through two loans. The first
loan, in the amount of $7.30 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt bonds
with average interest rates of 4.7%. The second loan, in the amount of
$5.89 million, is from the State of New Jersey, acting through the New
Jersey Department of Environmental Protection. The state is participating
in the Safe Drinking Water State Revolving Fund, authorized by the Safe
Drinking Water Act amendments of 1996, whereby the federal government is
funding the state loan at no interest cost. The effective interest rate
for the combined notes is approximately 2.59%. The proceeds of the loans
are financing a portion of the construction of the Mansfield Project (see
Note 8).
-13-
E'town has outstanding $12 million of 6.79% Senior Notes due December 15,
2007. The Note Agreement requires the maintenance of a consolidated fixed
charges coverage ratio of at least 1.5 to 1 and a debt to total
capitalization ratio not to exceed .65 to 1. As of September 30, 1999, the
fixed charges coverage ratio was 2.74 to 1 and the debt to total
capitalization ratio was .62 to 1, calculated in accordance with the Note
Agreement.
5. LINES OF CREDIT
E'town has $115 million of uncommitted lines of credit with several banks,
of which up to $55 million is available to E'town for use by the
Corporation or its unregulated subsidiaries and $90 million is available
to Elizabethtown as of September 30, 1999. These lines, together with
internal funds and proceeds of future issuances of debt and preferred
stock by Elizabethtown, and sales of common stock and issuances of short-
and long-term debt of E'town, are expected to be sufficient to finance the
Corporation's capital needs.
6. EARNINGS PER SHARE
Basic earnings per share are computed on the basis of the weighted average
number of shares outstanding. Diluted earnings per share assumes both the
conversion of the 6 3/4% Convertible Subordinated Debentures and common
stock equivalents, assuming all stock options are exercised. The
calculations of basic and diluted earnings per share for the three and
nine months ended September 30, 1999 and 1998 follow:
Three Months Nine Months
Ended Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
Thousands of Dollars Except
Per Share Amounts
Basic:
Net Income $7,953 $8,555 $20,010 $17,880
Average common shares
outstanding 8,612 8,381 8,562 8,201
----------------------------------
Basic earnings per share $ 0.92 $ 1.02 $ 2.34 $ 2.18
==================================
Diluted:
Net income $7,953 $8,555 $20,010 $17,880
After tax interest expense
applicable to 6 3/4%
Convertible Subordinated
Debentures 106 124 328 70
----------------------------------
Adjusted net income $8,059 $8,679 $20,338 $18,250
==================================
Average common shares
outstanding 8,612 8,381 8,562 8,201
Additional shares from
assumed exercise of
stock options 41 29 31 25
Additional shares from
assumed conversion of
6 3/4% Convertible 234 280 250 282
Subordinated Debentures
Average common shares
outstanding as adjusted 8,887 8,690 8,843 8,508
==================================
Diluted earnings per share $ 0.91 $ 1.00 $ 2.30 $ 2.15
==================================
-14-
7. NON-UTILITY PROPERTY AND OTHER INVESTMENTS
The detail of amounts included in Non-Utility Property and Other
Investments at September 30, 1999 and December 31, 1998 is as follows:
1999 1998
------ ------
In Thousands of Dollars Except
Per Share Amounts
-----------------
Funds held in trust by others $ 7,192 $ 7,234
Other capital assets 83 81
--------------------------------------------------
Elizabethtown Water
Company & Subsidiary 7,275 7,315
--------------------------------------------------
Concession fees on privatization
contracts - net of amortization 54,335 55,505
Capital assets from
privatization contracts - net
of amortization 4,946 3,341
Investments in real estate 9,296 11,341
Goodwill on AWM and AWWM
acquisitions - net
of amortization 4,593 5,401
Investment in SEGS 1,214 1,214
Other capital assets 2,171 556
Other 187 272
--------------------------------------------------
Total $ 84,017 $ 84,945
==================================================
Effective July 1998 E'town, through Liberty, entered into a contract with
the city of Elizabeth (Elizabeth), New Jersey to operate its water system
under a 40-year contract serving 17,900 customers. Under the contract,
Liberty made payments to Elizabeth of $19.7 million in 1998 and $12
million in June 1999 and is obligated to make a payment of $19 million in
June 2000. These amounts have been included in Concession Fees on
Privatization contracts, net of amortization in the table above. These
concession fees are being amortized on a straight-line basis over the life
of the contract. Also under the terms of the contract, Liberty will
deposit $57.8 million from revenues earned over the 40-year contract, of
which $52.3 million is due after 2012, into a fund administered by
Elizabeth to be used by Elizabeth to pay for capital improvements to the
water system. In addition, Liberty is responsible for $7.45 million of
construction expenditures, primarily for meter replacements, over the life
of the contract. These construction expenditures, as they are incurred,
are being amortized on a straight-line basis over the remaining life of
the contract. Of these total commitments, approximately $4.01 million is
expected to be expended in the next three years. E'town will receive all
the revenues from operating the system in accordance with rate increases
set forth in the contract. E'town is also responsible for all operating
expenses as well as the capital expenditures discussed above. Performance
by Liberty of the contract provisions is guaranteed by E'town.
E'town also performs the commercial billing operations for the wastewater
system of Elizabeth. E'town does not operate the wastewater system. E'town
does the wastewater billing for Elizabeth and remits all cash collected to
Elizabeth. Included in the Consolidated Balance Sheets of E'town as
Customer and Other Accounts Receivable at September 30, 1999 are the
receivables from the customers of Elizabeth for wastewater services in the
amount of $3.9 million. An offsetting liability to Elizabeth is included
in Accounts Payable and Other Liabilities which has been established to
reflect E'town's obligation to remit these funds to Elizabeth as collected.
-15-
In 1997 E'town formed a wholly-owned subsidiary, Edison Water Company
(Edison), for the purpose of managing the assets and operations of the
Edison Township water system under a 20-year contract. Edison serves
approximately 11,600 residential, commercial and industrial customers.
Edison bills and receives all water revenues generated as a result of
operating the water system of the township of Edison, New Jersey and pays
all the expenses under the contract. Edison expects to make expenditures
of approximately $25 million during the 20-year life of the contract of
which $12.29 million has been spent to date. Construction expenditures, as
they are incurred, are being amortized on a straight-line basis over the
remaining life of the contract. Performance by Edison of the contract
provisions is guaranteed by E'town.
Also included in Non-Utility Property and Other Investments at September
30, 1999 is $9.3 million of investments in several parcels of undeveloped
land in New Jersey. A parcel was sold in 1997 for $.4 million, resulting
in a gain of less than $.1 million. Two other parcels were sold in 1998
for $1.7 million resulting in a gain of less than $.1 million. Cash
proceeds of $1.2 million were received in 1998 for these two parcels and
the balance was financed with a one-year mortgage at an interest rate of
8%, with full payment due by year-end 1999. In the first quarter of 1999,
Properties sold a parcel of land in Green Brook, New Jersey, which has
been under contract since 1995, for $5.83 million, at a gain of $3.2
million ($2.08 million net of taxes). Cash proceeds of $1.50 million and
$.54 million were received in February 1999 and April 1999, respectively.
The remaining $3.79 million has been financed with a 7.75% mortgage, to be
paid over two years. The mortgage balance, including accrued interest, of
$3.84 million is included in Customer and Other Accounts Receivable in
E'town's Consolidated Balance Sheets. The gain was recognized in the
first quarter of 1999 and is reflected in the accompanying 1999 financial
statements. The sale proceeds will be invested into water and wastewater
investments that produce a current return. Properties has entered into
contracts to sell all of its remaining parcels. The eventual sale of these
parcels is contingent upon the purchaser obtaining various approvals for
development. This process could take several years. Based upon independent
appraisals received at various times prior to 1997 and the expected sales
prices for properties under contract to be sold, the estimated net
realizable value of each property exceeds its respective carrying value as
of September 30, 1999.
In 1998 E'town exercised an option to purchase the operations of Applied
Wastewater General Partnership (AWG) to provide a full complement of water
and wastewater services and closed on the transaction in June 1998. The
purchase price, in a non-cash transaction, was $6.6 million (185,005
restricted common shares) for the three companies that now comprise AWM
and $.04 million (1,305 restricted common shares) for AWWM, a regulated
wastewater utility, in a stock-for-stock transaction accounted for as a
purchase. The purchase price was subject to a potential downward
post-closing adjustment based upon a multiple of earnings for the twelve
months ended March 31, 1998. As required by the purchase contract, E'town
had undertaken an audit of AWG for such period. This process resulted in a
downward post-closing adjustment of $.9 million (25,756 shares) which has
been reflected in E'town's Consolidated Balance Sheets as of September 30,
1999. The adjusted goodwill amounts to $4.6 million as of September 30,
1999 and is being amortized over a 40-year period.
In June 1999, Mount Holly purchased Homestead Water Utility, Inc. and AWWM
purchased Homestead Treatment Utility, Inc. for a combined purchase price
of $1.8 million. The entities provide water and wastewater services to
approximately 800 customers of the Homestead community in southern New
Jersey.
Included in Non-Utility Property and Other Investments at September 30,
1999 is an investment of $1.21 million ($.43 million net of related
deferred taxes) in a limited partnership that owns Solar Electric
Generating System V (SEGS), located in California. The Corporation owns a
3.19% interest in SEGS. The transaction is being accounted for on the
equity method. The Corporation will continue to monitor the relationship
between the carrying and net realizable values of its investment in SEGS,
based upon information provided by SEGS management as well as through cash
flow analyses.
-16-
8. REGULATORY MATTERS
Rates
ELIZABETHTOWN
Elizabethtown is evaluating a potential need to file for rate relief early
in 2000 to recover additional construction and financing costs incurred
since base rates were last established in October 1996.
MOUNT HOLLY
In January 1999, Mount Holly filed a petition with the New Jersey Board of
Public Utilities (BPU) for a $2.09 million or 40.55% rate increase, which
reflects additional construction and financing costs, as well as increases
in operating costs since base rates were last established in January 1996.
This filing also included $8.96 million in costs with a corresponding rate
increase of $1.30 million, for the portion of Mount Holly's Mansfield
Project that was placed in service in the third quarter of 1998. On August
9, 1999, Mount Holly filed a supplemental petition to this case for a rate
increase to include the cost of the remaining portion of the Mansfield
Project that will be placed into service by January 2000. This increase
would also replace the Purchased Water Adjustment Clause (PWAC), now in
effect, as Mount Holly will no longer be purchasing water from another
purveyor as of the date the remaining portion of the Mansfield Project
goes into service. The parties to the case signed a stipulation agreement
in October 1999 whereby a rate increase of $1.88 million, or a net
increase of $.51 million after elimination of the PWAC, will go into
effect on January 1, 2000.
9. SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires that companies disclose segment data based upon how
management makes decisions, allocates resources and measures performance.
Segment data for the three and nine month periods ended September 30, 1999
and 1998 is presented as follows:
-17-
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
In Thousands of Dollars
-----------------------
Operating Revenues:
Regulated Utilities $ 39,290 $ 38,852 $105,987 $102,098
Contract Operations 5,642 5,097 14,727 8,296
Engineering/Operations/
Construction 2,757 2,280 8,004 2,530
Intersegment Elimination (2,096) (2,322) (6,038) (4,141)
--------------------------------------
Consolidated Operating
Revenues $ 45,593 $ 43,907 $122,680 $108,783
======================================
Operating Expenses:
Regulated Utilities $ 27,560 $ 26,666 $ 76,318 $ 72,176
Contract Operations 4,566 4,416 12,603 7,313
Engineering/Operations/
Construction 2,618 2,072 7,690 2,407
Financing & Investment 136 158 444 280
Intersegment Elimination (2,096) (2,322) (6,038) (4,141)
--------------------------------------
Consolidated Operating
Expenses $ 32,784 $ 30,990 $ 91,017 $ 78,035
======================================
Interest Expense:
Regulated Utilities $ 4,034 $ 3,797 $ 11,900 $ 11,511
Contract Operations 396 351 995 546
Engineering/Operations/
Construction 1 12 6 12
Financing & Investment 372 353 1,019 978
--------------------------------------
Consolidated Interest
Expense $ 4,803 $ 4,513 $ 13,920 $ 13,047
======================================
Net Income
Regulated Utilities $ 7,612 $ 8,446 $ 17,799 $ 18,372
Contract Operations 680 359 1,183 523
Engineering/Operations/
Construction 138 167 308 112
Financing & Investment (477) (417) 720 (1,127)
--------------------------------------
Consolidated Net Income $ 7,953 $ 8,555 $ 20,010 $ 17,880
======================================
As of As of
September 30, December 31,
1999 1998
------ ------
Total Assets:
Regulated Utilities $728,459 $688,046
Contract Operations 73,431 68,539
Engineering/Operations/
Construction 5,189 3,744
Financing & Investment 53,690 44,964
Intersegment Elimination (37,411) (26,551)
-------- --------
Consolidated Total Assets $823,358 $778,742
======== ========
-18-
10. STOCK OPTIONS
In connection with the adoption of SFAS 123 "Accounting for Stock-Based
Compensation," which was effective in 1996, the Corporation elected to
continue to account for its Stock Option Plan (Plan) using the method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and provide proforma disclosure of the effect
of adopting SFAS 123. The Corporation issued 50,000 stock options under
the Plan in the second quarter of 1999. The effect of accounting for these
options under SFAS 123 would be to reduce earnings by $.06 million or $.01
per basic share for the nine month period ended September 30, 1999.
11. OTHER EVENTS
In August 1999, the Governor of the State of New Jersey declared a "Water
Emergency" for the entire state and issued mandatory restrictions on
outdoor, nonessential water use. Due to unusually low levels of rainfall
during June and July the Governor deemed these measures necessary to
preserve the integrity of several of the states reservoir and well
supplies. Customers of Elizabethtown, Mount Holly, Edison and Liberty were
subject to these restrictions. The water systems operated by E'town's
subsidiaries have adequate supplies of water to meet the needs of their
customers. These restrictions affected the amount of water consumed by a
substantial number of the Corporation's customers. The restrictions were
lifted in October 1999.
In September 1999, Elizabethtown took its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant, out of service as a result of
flooding from Tropical Storm Floyd. For several days, Elizabethtown had
difficulty maintaining adequate water pressure in portions of its
distribution system as its secondary water treatment plant was supplying
the predominant portion of the water needs of Elizabethtown's customers.
Overall system production levels were substantially less than normal.
Customers in portions of a few municipalities were without water service
for a period of up to three days. Costs incurred to repair and replace
equipment damaged by the flood and to respond to inquiries by customers,
regulatory bodies and the media are being either capitalized or deferred
and are expected to be largely recoverable through insurance. The Company
will request the BPU to allow noninsurable costs to be recovered in
rates. The loss of revenues due to below normal water consumption for the
10-day period are not recoverable through insurance and adversely effected
basic earnings per share by approximately $.03 for the third quarter and
nine months ended September 30,1999. (See Note 12 for legal matters related
to Tropical Storm Floyd.)
12. LEGAL MATTERS
On September 23, 1999, two parties filed separate class action lawsuits for
compensatory damages and related fees on behalf of themselves and
similarly situated residential and commercial customers against
Elizabethtown Water Company, Edison Water Company and Liberty Water
Company. The lawsuit alleges negligence regarding the quantity and quality
of water services during the period in September 1999 when Elizabethtown's
main water treatment plant was flooded from Tropical Storm Floyd and was
taken out of service. Elizabethtown has notified its insurance carrier of
the lawsuit and plans to file a motion for summary judgment to dismiss the
lawsuit as a class action proceeding prior to answering the allegations.
E'town Corporation maintains that such allegations are without merit and
believes that the plaintiffs' chances of prevailing are not significant.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
E'town Corporation (E'town or Corporation), a New Jersey holding
company, is the parent company of Elizabethtown Water Company
(Elizabethtown or Company), Edison Water Company (Edison), E'town
Properties, Inc. (Properties), Liberty Water Company (Liberty), Applied
Water Management, Inc. (AWM) and Applied Wastewater Management, Inc.
(AWWM). The Mount Holly Water Company (Mount Holly) is a wholly-owned
subsidiary of Elizabethtown. The assets and operating results of
Elizabethtown constitute the predominant portions of E'town's assets and
operating results. Mount Holly contributed about 3% and Liberty, AWM and
Edison each contributed 4% of the Corporation's consolidated operating
revenues for 1998. The regulated utilities, Elizabethtown, Mount Holly
and AWWM, comprise the Regulated Utilities segment, Liberty and Edison
comprise the Contract Operations segment, AWM is the
Engineering/Operations/Construction segment and E'town and
Properties comprise the Financing and Investment segment (See Note 9 to
E'town's Notes to Consolidated Financial Statements). The following
analysis sets forth significant events affecting the financial condition
of the various segments at September 30, 1999, and the results of
operations for the three and nine month periods ended September 30, 1999
and 1998.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures Program
For the nine months ended September 30, 1999 capital expenditures were
$38.8 million. Included in this total is $1.8 million for the purchase
of a regulated water and wastewater operation by Mount Holly and AWWM in
June, $1.8 million was for capital additions under the privatization
contracts and $35.2 million was for other additions and improvements to
water utility plant and wastewater facilities. For the three years
ending December 31, 2001, capital and investment requirements for E'town
are estimated to be $181.4 million, consisting of (i) expenditures for
the Regulated Utilities Segment ($107.5 million for Elizabethtown, $17.0
million for Mount Holly and $16.4 million for AWWM), (ii) investments in
the Contract Operations segment for concession payments by Liberty and
capital improvements for Liberty and Edison of $39.0 million, and (iii)
investments in the Engineering/Operations/Construction segment of $1.5
million. These estimates do not include any amounts for possible
additional acquisitions or privatization activities in the three-year
period.
REGULATED UTILITIES SEGMENT
Elizabethtown
Elizabethtown's three-year capital program includes $50.6 million for
routine projects (services, hydrants and main extensions not funded by
developers) and $56.9 million for transmission system upgrades, a new
operations center and other projects. Elizabethtown is evaluating the
need to expand its Canal Road Water Treatment Plant to provide for
customer growth and further enhance system reliability. Elizabethtown
is evaluating a potential need to file for rate relief early in 2000 to
ensure that such costs are adequately reflected in rates (see Economic
Outlook).
Mount Holly
During the next three years, Mount Holly expects to spend $17.0 million,
of which $12.7 million is expected to be spent in 1999 for the
construction of the Mansfield Project as described below.
Mount Holly currently obtains all of its water from wells drilled into
an aquifer, which has been subject to over- pumping by various users in
a portion of southern New Jersey. The state adopted legislation
requiring all local purveyors, including Mount Holly, to obtain
alternate supplies and reduce their withdrawals from the affected parts
of the aquifer. Mount Holly is constructing a Project, called the
Mansfield Project, to obtain water from outside the affected part of the
aquifer for delivery into the Mount Holly system. A portion of this
project was placed into service in the third quarter of 1998 and the
remaining portion of the project is expected to be in service by
January 1, 2000.
-20-
In January 1999, Mount Holly filed a petition with the BPU for a $2.09
million or 40.55% rate increase, which reflects additional construction
and financing costs, as well as increases in operating costs since base
rates were last established in January 1996. This filing also included
$8.96 million in costs with a corresponding rate increase of $1.30
million, for the portion of Mount Holly's Mansfield Project that was
placed in service in the third quarter of 1998. On August 9, 1999, Mount
Holly filed a supplemental petition to this case for a rate increase to
include the cost of the remaining portion of the Mansfield Project that
will be placed into service by January 1, 2000. This increase would also
replace the Purchased Water Adjustment Clause (PWAC), now in effect, as
Mount Holly will no longer be purchasing water from another purveyor as
of the date the remaining portion of the Mansfield Project goes into
service. The parties to the case signed a stipulation agreement in
October 1999, whereby a rate increase of $1.9 million, or a net increase
of $.5 million after elimination of the PWAC, is expected to go into
effect on January 1, 2000, subject to approval by the BPU.
AWWM
AWWM expects to incur capital expenditures of $16.4 million in the next
three years, the predominant portion of which is expected to be spent in
2000. These expenditures are primarily for the purchase of wastewater
plants from developers upon completion of their construction by AWM.
CONTRACT OPERATIONS SEGMENT
LIBERTY
Under the contract to operate the water system of the City of Elizabeth,
New Jersey, Liberty made payments to Elizabeth of $19.7 million in 1998
and $12.0 million in June 1999 and is contractually obligated to make a
payment to Elizabeth of $19 million in June 2000. Also, under the terms
of the contract, Liberty will deposit $57.8 million from revenues earned
during the 40-year contract, of which $52.4 million is due after 2012,
into a fund administered by Elizabeth to be used by Elizabeth to pay for
capital improvements to the water system. In addition, Liberty is
responsible for $7.8 million of construction expenditures, primarily for
meter replacements, over the life of the contract. Of the total
construction expenditures, approximately $4.0 million is expected to be
expended in the next three years.
EDISION
Under the contract to operate the water system of the Township of
Edison, New Jersey, Edison Water Company expects to spend $3.6 million
during the next three years to upgrade the system.
ENGINEERING/OPERATIONS/CONSTRUCTION SEGMENT
AWM
AWM expects to incur capital expenditures of $1.5 million during the
next three years. These expenditures consist primarily of vehicles and
equipment used in the construction and waste hauling operations. On
November 5, 1999, AWM acquired a septic services business for $.7
million.
Capital Resources
During 1998 E'town financed 35.5% of its capital expenditures, including
concession fees for the Regulated Utilities segment and investments in
the Contract Operations and Engineering/Operations and Construction
segments, from internally generated funds (after payment of common stock
dividends). The balance was financed with a combination of short-term
borrowings under lines of credit, proceeds from capital contributions
from E'town (funded by issuances of Common Stock under the Corporation's
Dividend Reinvestment and Stock Purchase Plan) and long-term debt.
-21-
For the three-year period ending December 31, 2001, E'town estimates
that 52.2% of its currently projected capital expenditures and
concession fees for all segments are expected to be financed with
internally generated funds (after payment of common stock dividends).
The balance will be financed with a combination of proceeds from the
sale of E'town common stock, medium-term notes, proceeds of tax-exempt
New Jersey Economic Development Authority (NJEDA) bonds, and short-term
borrowings. Mount Holly's Mansfield Project will be financed by
requisitions from the New Jersey Environmental Infrastructure Trust
Financing Program. The NJEDA has granted preliminary approval for the
financing of almost all of Elizabethtown's major projects during the
next three years. Elizabethtown expects to pursue additional tax-exempt
financing to the extent that final allocations are granted by the NJEDA.
In October 1998, E'town filed a registration statement with the
Securities and Exchange Commission (SEC) to issue up to $75 million of
unsecured medium-term notes. E'town plans to file an amended
registration statement and issue approximately $30 million of these
notes in the first quarter of 2000 to repay short-term debt incurred to
finance the acquisition of the contract to operate the water system of
the City of Elizabeth and capital costs for the non-regulated
subsidiaries.
In November 1998 Mount Holly closed on two loans that will provide up to
$13.2 million in 2.60% financing for the Mansfield Project through the
New Jersey Environmental Infrastructure Trust Financing Program. The
first loan, in the amount of $7.3 million, is through the New Jersey
Environmental Infrastructure Trust (Trust), which issued tax-exempt
bonds with average interest rates of 4.7%. The second loan, in the
amount of $5.9 million, is from the state of New Jersey, acting through
the New Jersey Department of Environmental Protection, funded by federal
monies at no interest cost. The effective interest rate for the combined
notes is approximately 2.59%.
E'town's senior debt is currently rated A3 and A- and Elizabethtown's
senior debt is currently rated A3 and A by Moody's Investors Service and
Standard & Poor's Ratings Group, respectively.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
INTEREST RATE RISK
The Corporation is subject to the risk of fluctuating interest rates in
the normal course of business. The Corporation manages interest rates
through the use of fixed and, to a lesser extent, variable rate debt. A
hypothetical single percentage point change in interest rates for the
three months ended September 30, 1999 would result in a $.3 million
change in interest costs related to short-term and variable rate debt
and to earnings before tax.
RESULTS OF OPERATIONS
Net Income for the three months ended September 30, 1999 was $8.0
million or $.92 per basic share on a basic basis as compared to $8.6
million or $1.02 per basic share for the same period in 1998.
The third quarter decrease of $.10 per basic share is comprised of an
increase of $.14 related to higher water consumption in July due to hot,
dry weather, a decrease of approximately $.09 from mandatory
restrictions on outdoor water usage imposed by the State of New Jersey
in August due to drought conditions and a decrease of approximately $.02
from reduced water consumption in September as a result of flooding of
Elizabethtown's Raritan-Millstone Plant caused by Tropical Storm Floyd
(Floyd). As a result of Floyd, Elizabethtown produced water
substantially below its normal capacity for approximately a ten-day
period. The quarter's basic earnings per share further decreased $.05 as
a result of a net increase in operation and maintenance expenses, $.05
due to higher interest expense and $.03 as a result of an increase in
average shares outstanding.
The third quarter decrease in net income of $.6 million is comprised of
an increase of $1.2 million due to July's hot weather offset by
decreases of $.8 million due to August's drought, $.2 million from
reduced water consumption in September resulting from Tropical Storm
Floyd, $.4 million due to increased operation and maintenance expenses
and $.4 million due to higher interest expense.
-22-
Net income for the nine months ended September 30, 1999 was $20.0
million or $2.34 per basic share as compared to $17.9 million or $2.18
per basic share for the same period in 1998.
Net income increased by $2.1 million or $.16 per basic share for the
nine month period due principally to an after-tax gain on the sale of a
real estate parcel and inclusion of the nine-month 1999 earnings of
Liberty which began operation in the second quarter of 1998.
Operating Revenues increased $1.7 million or 3.8% for the three months
ended September 30, 1999 compared to the same period in 1998. The
Regulated Utilities segment accounted for $.7 million of the increase
reflecting higher water consumption among residential customers due to
the aforementioned dry, hot weather in July. The Contract Operations
segment contributed $.5 million to the increase and the
Engineering/Operations segment contributed $.5 million to the increase.
Based upon historical revenue patterns, the impact of the aforementioned
water restrictions and flooding resulted in an estimated loss of $.3
million in revenues during the third quarter.
Operating revenues increased $13.9 million or 12.8% for the nine months
ended September 30, 1999 as compared to the comparable period in the
prior year. Revenues increased for the nine months by $2.0 million for
the Regulated Utilities segment, $6.4 million for the
Contract/Operations segment, reflecting the inclusion of Liberty
beginning in July 1998 and $5.5 million reflecting the inclusion of the
Engineering/Operations and Construction segment, also beginning in July
1998.
Operation Expenses increased $1.1 million or 6.6% for the three months
ended September 30, 1999 compared to the same period in 1998. Operation
Expenses of the Regulated Utilities segment increased $.8 million or
6.9% primarily due to labor costs for additional employees as well as
Mount Holly's cost, which is reflected in utility rates under the PWAC,
of purchasing water from another purveyor, as discussed above. Operation
Expense for the Engineering/Operations/Construction segment increased
$.7 million, primarily due to increased construction activity, while the
Contract Operations segment experienced a decrease of $.4 million in
operating costs.
Operation Expenses increased $9.8 million or 24.9% for the nine months
ended September 30, 1999 as compared with the same period in the prior
year. Operations Expenses increased $3.6 million for the Regulated
Utilities segment for aforementioned reasons. The Engineering/
Operations segment showed an increase of $4.6 million and Contract
Operations showed an increase of $1.4 million, largely reflecting the
acquisition of AWM and Liberty, respectively in 1998. The Financing and
Investment segment remained relatively constant, reflecting an increase
of $.2 million.
Maintenance Expenses remained flat for the three month period and
increased $.7 million or 14.0% for the nine month period ended September
30, 1999 as compared to the comparable periods in the prior year. The
year-to-date increase occurred primarily due to inclusion of the
operations of AWM and Liberty. Maintenance costs remained relatively
constant for the Regulated Utilities segment primarily due to favorable
weather conditions in the winter of 1999 as well as ongoing preventive
maintenance programs and cost control efforts.
Depreciation and Amortization Expense increased $.6 million or 20.1% for
the three month period primarily due to commencement of the amortization
of concession fees associated with the contract to operate the water
system of the city of Elizabeth, New Jersey.
Depreciation and Amortization expense increased $1.7 million or 17.8%
for the nine month period due to amortization of the concession fees
discussed above and a higher level of depreciable plant in service.
-23-
Revenue Taxes increased $.1 million or 1.4% for the three month period
and $.4 million or 3.3% for the nine month period primarily due to water
sales by Elizabethtown as discussed above.
Real Estate, Payroll and Other Taxes Expenses increased $.3 million or
48.7% for the three month period and $.5 million or 24.3% for the nine
month period primarily due to increased payroll taxes as a result of
higher wage levels and additional employees in the Regulated Utilities
segment.
Federal Income Taxes as a component of operating expenses decreased $.3
million or 6.1% for the three month period and decreased $.1 million or
1.3% for the nine month period due to changes in taxable operating
income for each segment.
Other Income (Expense) decreased $.2 million or 57.7% for the three
month period due primarily to a decrease in the equity component of the
allowance for funds used during the construction of major projects.
Other Income (Expense) increased $2.1 million or 264.9% for the nine
month period due to a gain on the sale of real estate in the first
quarter of 1999 of $3.2 million ($2.1 million net of taxes).
Total Interest Charges increased $.3 million or 6.4% for the three month
period and increased $1.1 million or 8.6% for the nine month period.
The increase for both periods is due to the issuance of long-term notes
by Mount Holly in November 1998 through the New Jersey Environmental
Infrastructure Trust Financing Program to finance a portion of the
construction of Mount Holly's Mansfield Project and an increase in
short-term interest expense as a result of the issuance of bank notes to
finance a scheduled concession payment of $12.0 million in June, 1999 by
Liberty to the City of Elizabeth and to fund Elizabethtown and Mount
Holly's ongoing capital programs.
ECONOMIC OUTLOOK
Forward Looking Information
Information in this report includes certain forward looking statements
within the meaning of the Federal securities laws regarding future
earnings, capital expenditures and anticipated actions of regulators,
among other things. Any forward looking statements are based upon
information currently available and are subject to future events, risks
and uncertainties that could cause actual results to differ materially
from those expressed in the statements. Such events, risks and
uncertainties include, without limitation, actions of regulators, the
effects of weather, changes in historical patterns of water consumption
and demand, including changes through increased use of water-conserving
devices, conditions in capital and real estate markets, increases in
operating expenses due to factors beyond the Corporation's control,
changes in environmental regulation and associated costs of compliance
and additional investments or acquisitions which may be made by the
Corporation.
E'town Corporation and Subsidiaries
During the next several years, management will seek to increase earnings
per share by (i) maximizing earned returns on the Regulated Utilities
segment through expansion efforts to increase sales and cost control
measures and (ii) investing in water and wastewater assets (including
municipal privatization contracts, as well as designing, constructing,
operating and purchasing wastewater assets through AWM and AWWM,
discussed below) which produce a current return. The Corporation intends
to continue to sell Properties' real estate holdings during the next
several years to fund a portion of the investment planned for the
regulated and non-regulated businesses. The balance of such funding will
be generated from internal and external sources.
-24-
Earnings per share will vary going forward due to the effect of weather
on costs and pumpage, timing and adequacy of rate relief for the
regulated utilities, time elapsed since the last rate increase, the
nonrecurring effect of real estate sales and other factors. For 1999
E'town expects consolidated earnings per share to be marginally greater
than in 1998 due to an unusually hot, dry summer in 1999 and gains on
the sale of real estate. These increases are expected to be offset
somewhat by an increase in the number of outstanding shares.
Other Matters
In August 1999, the Governor of the State of New Jersey declared a
"Water Emergency" for the entire state and issued mandatory restrictions
on outdoor, nonessential water use. Due to unusually low levels of
rainfall during June and July the Governor deemed these measures
necessary to preserve the integrity of several of the states reservoir
and well supplies. Customers of Elizabethtown, Mount Holly, Edison and
Liberty are subject to these restrictions. The water systems operated by
E'town's subsidiaries have adequate supplies of water to meet the needs
of their customers. These restrictions affected the amount of water
consumed by a substantial number of the Corporation's customers. The
restrictions were lifted in October 1999. Management believes these
restrictions resulted in approximately a $.09 negative effect on
basic earnings per share in the third quarter.
In September 1999, Elizabethtown took its primary water treatment plant,
the Raritan-Millstone Water Treatment Plant, out of service as a result
of flooding from Tropical Storm Floyd. For several days, Elizabethtown
had difficulty maintaining adequate water pressure in portions of its
distribution system as its secondary water treatment plant was supplying
the predominant portion of the water needs of Elizabethtown's customers.
Overall system production levels were substantially less than normal.
Customers in portions of a few municipalities were without water service
for a period of up to three days. Costs incurred to repair and replace
equipment damaged by the flood and to respond to inquiries by customers,
regulatory bodies and the media are being either capitalized or deferred
and are expected to be largely recoverable through insurance. The
Company will request the BPU to allow noninsurable costs to be recovered
in rates. The loss of revenues due to below normal water consumption
for the 10-day period are not recoverable through insurance and
adversely effected earnings per basic share by approximately $.03.
Regulated Utilities Segment
Elizabethtown, Mount Holly and AWWM
Elizabethtown is evaluating a potential need to file for rate relief
early in 2000 to recover additional construction and financing costs
incurred since base rates were last established in October 1996.
Mount Holly earned a rate of return on common equity of 4.7% in 1998,
compared to an authorized rate of return of 11.25%, established in its
1996 base rate case. Mount Holly earned significantly below its
authorized return in 1998 and 1997 as the Company was precluded from
filing for needed rate relief due to recently settled litigation with
another purveyor.
Mount Holly continues to under perform in relation to its authorized
rate of return. Management expects Mount Holly to increase its
contribution to E'town's earnings per share throughout 2000 as a result
of the Stipulation Agreement signed in October 1999 whereby a rate
increase of $1.9 million, or a net increase of $.5 million after
elimination of the PWAC, is expected to go into effect January 1, 2000,
subject to approval by the BPU.
AWWM expects to realize rates of return comparable to those earned by
Elizabethtown on its anticipated investments of $16.4 million in new
wastewater facilities after it expands its customer base in the next
several years.
-25-
In June 1999, Mount Holly purchased Homestead Water Utility, Inc. and
AWWM purchased Homestead Treatment Utility, Inc. for a combined
purchase price of $1.8 million. The entities provide water and
wastewater services to approximately 800 customers of the Homestead
community in southern New Jersey.
Contract Operations Segment
Liberty
Effective July 1, 1998, E'town, through its Liberty Water Company
subsidiary, commenced operation of the 17,900 customer water supply
system of the city of Elizabeth under a 40-year contract. Liberty is
expected to realize a return on its capital in an amount similar to that
currently earned by E'town's regulated operations.
Edison
Effective July 1, 1997, E'town, through its Edison Water Company
subsidiary, commenced operation of Edison Township's 11,600-customer
water system under a 20-year contract. Edison is expected to realize a
return on its capital in an amount similar to that currently earned by
E'town's regulated operations. Contributions to earnings will be small
through 2002 and then will increase as rate increases specified in the
contract take effect.
E'town continues to pursue opportunities to operate municipal water and
wastewater systems under long-term contracts, primarily in New Jersey.
E'town will focus on opportunities where it may have an advantage due to
location or experience in operation.
Engineering/Operations/Construction
AWM
AWM provides "one-stop shopping" for water and wastewater services to
residential and commercial developers. These services include the
design, construction and operation of water and wastewater facilities
and, in some instances, purchase of such utilities at project build-out
by AWWM, thereby adding to E'town's regulated utility customer base.
Financing and Investment Segment
E'town and Properties
E'town is in the process of selling its various parcels of undeveloped
land carried as investments of $9.3 million at September 30, 1999. One
of the real estate parcels was sold in 1997 for $.4 million, resulting
in a gain of less than $.1 million. Two other parcels were sold in 1998
for $1.7 million resulting in a gain of less than $.1 million. In the
first quarter of 1999, Properties sold a parcel of land in Green Brook,
New Jersey, which has been under contract since 1995, for $5.83 million,
at a gain of $3.2 million ($2.08 million net of taxes). Cash proceeds of
$1.50 million and $.54 million were received in February 1999 and April
1999, respectively. The remaining $3.79 million has been financed with a
7.75% mortgage, to be paid over two years. The sale proceeds will be
invested into water and wastewater investments that produce a current
return. Properties has entered into contracts for the sale of all of its
remaining parcels at prices that exceed the carrying cost of such
properties. The eventual sale of these parcels is contingent upon the
purchaser obtaining various approvals for development and could take
several years. E'town expects to invest the sale proceeds from the
remaining parcels into water and wastewater utility investments that
produce a current return. The Corporation has no plans to make
additional investments other than in water and wastewater projects.
New Accounting Pronouncements
See Note 2 of E'town's Notes to Consolidated Financial Statements for a
discussion of new accounting standards.
-26-
Year 2000
State of Readiness
The Corporation has assessed its significant business systems, as well
as non-critical, peripheral support systems for compliance with the Year
2000 computer challenge. The assessment concluded that all significant
business systems (i.e. customer billing and service, financial, water
treatment operating and control, water quality laboratory information
and telemetric data acquisition systems) are Year 2000 compliant. The
assessment also included inquiries as to the state of readiness of
significant vendors whose services to the Corporation could have an
impact on the Corporation's ability to deliver service to its customers.
Management concluded that the delivery of electric power as well as
chemicals used in the water treatment process are two areas of
significant importance and received documentation from the vendors who
provide these services that indicates their ability to provide service.
Therefore, the Corporation expects no disruption in the services it
provides to its customers and expects to process transactions in its
financial, customer billing and customer services systems. See
Contingency Plan below for a discussion of alternative sources of power.
The assessment had identified certain modifications to peripheral support
systems that have since been implemented.
The Costs To Address The Corporation's Year 2000 Issues
The significant business systems of the Corporation defined above are
Year 2000 compliant and have been operational for up to several years.
Therefore, no further costs are expected to be incurred in connection
with bringing these systems into compliance. The peripheral support
systems required the Corporation to incur costs of approximately $.3
million to bring them into compliance.
Risks Associated With The Corporation's Year 2000 Issues
Management believes that all identifiable issues with respect to Year
2000 compliance have been addressed, or will be addressed, in sufficient
time and in sufficient detail to preclude any disruption in service or
adverse effect on the Corporation's financial profile. Management,
therefore, believes that risks associated with this issue are minimal
with respect to those areas, which are internal to the Corporation and
over which management exercises control. Those areas that are external
to the Corporation i.e. issues associated with our vendors, have been
mitigated to the extent possible through inquiry of our vendors, tests
of their claims of Year 2000 compliance and development of contingency
plans as considered appropriate.
Contingency Plan
There are operational contingency plans in place on an ongoing basis to
address issues, such as natural disasters, that could result in a
disruption of service. These procedures would be activated in the event
that certain physical facilities were not operable as a result of
failures by our vendors associated with Year 2000 issues. In addition,
Elizabethtown Water Company has alternative electric, natural gas and
diesel generation capacity that could sustain a significant level of
pumping capacity for an indefinite period of time.
-27-
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
On September 23, 1999, two parties filed separate class action lawsuits
for compensatory damages and related fees on behalf of themselves and
similarly situated residential and commercial customers against
Elizabethtown Water Company, Edison Water Company and Liberty Water
Company. The lawsuit alleges negligence regarding the quantity and
quality of water services during the period in September 1999 when
Elizabethtown's main water treatment plant was flooded from Tropical
Storm Floyd and was taken out of service. Elizabethtown has notified
its insurance carrier of the lawsuit and plans to file a motion for
summary judgment to dismiss the lawsuit as a class action proceeding
prior to answering the allegations. E'town Corporation maintains that
such allegations are without merit and believes that the plaintiffs'
chances of prevailing are not significant.
Items 2 - 5:
Nothing to Report.
Item 6(a) - Exhibits
Exhibits to Part I:
Exhibit 12 - E'town Corporation and Subsidiaries -
Computation of Ratio of Earnings to Fixed Charges
Exhibit 12(a) - Elizabethtown Water Company - Computation of
Ratio of Earnings to Fixed Charges
Exhibit 12(b) - Elizabethtown Water Company - Computation of
Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27 - E'town Corporation and Subsidiaries and
Elizabethtown Water Company and Subsidiary -
Financial Data Schedules
Item 6(b) - Reports on Form 8-K
The Corporation filed a current Form 8-K on September 24, 1999 to
disclose that Elizabethtown Water Company, its principal operating
subsidiary, took its primary water treatment plant out of service as a
result of flooding from Tropical Storm Floyd.
-28-
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1999
E'TOWN CORPORATION
ELIZABETHTOWN WATER COMPANY
/s/ Gail P. Brady
________________________________
Gail P. Brady
Treasurer
/s/ Dennis W. Doll
________________________________
Dennis W. Doll
Controller
-29-
EXHIBIT INDEX
12 E'town Corporation and
Subsidiaries - Computation of
Ratio of Earnings to Fixed
Charges
12(a) Elizabethtown Water Company -
Computation of Ratio of
Earnings to Fixed Charges
12(b) Elizabethtown Water Company -
Computation of Ratio of
Earnings to Fixed Charges
27 E'town Corporation and
Subsidiaries and Elizabethtown
Water Company And Subsidiary - Financial Data
Schedules